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What are the pros and cons of property crowdfunding

What are the pros and cons of property crowdfunding
October 26, 2017 Brickowner

It is easy to get swept up in a fad. Is property crowdfunding a wave that is about to break or the next big thing? This article examines the pros and cons of property crowdfunding platforms and explains why they are becoming a mainstream way to earn monthly income from property.

Pros

  • Ease, diversification and efficiency.
  • An opportunity for investors to invest smaller amounts (£100+) in traditional and sophisticated property investment.
  • Property investment flexibility.

Ease and efficiency

Investments made through property crowdfunding platforms can be managed online, where succinct investment packs and research, provide the information needed for a straight forward property investment decisions. Investors can now access the property market irrespective of their location, which particularly benefits foreign investors or expats who struggle to gain exposure to the British property market.

Furthermore, investments made using platforms enable easy diversification, at a time where returns across the UK property market vary wildly. Traditional residential investors typically invest in a single property (or a small portfolio of properties), meaning all ‘their eggs are in one basket’. Investors using a platform can split their investment into small portions across a wide array of property investment opportunities due to their funds being used to buy shares in property investments – this aides diversification.

In terms of tax efficiency, crowdfunded property investments avoid the recent changes to buy-to-let property and simply pay tax on dividends and capital gains. Investors choosing to invest in property via a platform also avoid stamp duty tax (due to the structure of the investment) – except in the secondary market where buyers are liable to pay a 0.5% surcharge. These tax advantages significantly overshadow traditional property investments in terms of their tax efficiently. Efficient tax structures support platforms as a low-cost method to invest in property and earn a regular passive income.

Access

These platforms are highly efficient for an investor. When investors’ funds are aggregated using a crowdfunding platform, they are able to invest in large commercial property investments and a wide array of residential property usually outside of their reach due to high minimum investment limits. Therefore, by aggregating funds, property crowdfunding platforms allow investors to invest in large scale high return projects previously outside of their reach

Flexibility

Property crowdfunding platforms are a highly flexible mechanism, when compared to tradition property investments. Traditionally, selling property investments is a challenging, lengthy and time-consuming process that involves additional exist costs. Now, by implementing the latest technology, crowdfunding platforms can provide a secondary market for investors to buy and sell shares of their property investments. This process offers a greater flexibility to existing investors because, subject to demand, they can sell their investments early. Equally, new investors who have missed fully funded investment opportunities still have a chance to invest. The secondary market offers investors an even greater array of property investment choices, further adding to their diversification options.

Cons

  • Investors cannot directly manage a property.
  • Poor performing investments may be challenging to sell.
  • No access to the physical property.

Property management

Property investors that use crowdfunding platforms do not have direct control over the property they are investing in. Essentially, control of the property is passed onto property managers who act on behalf of a pool of investors to safeguard high returns. While having a property manager, who is an expert in their function is advantageous, a single investor cannot make their own decisions on how the property should be managed. Direct control of a property is not required to ensure a high return; however, some individuals may prefer being in control of variables such as gearing ratios and property use. On the other hand, by using property managers, individuals reap the benefits of earning a passive regular income – not one for those that hate the thought of handing over control.

Liquidity?

An investment that does not perform well might be challenging to sell on a property crowdfunding platform. However, this is no different to underperforming traditional property investments. For example, if a buy-to-let landlord has struggled to let out their property, it is likely that selling the property will be challenging or completed at a loss. While this difficulty is shared with traditional and crowdfunded property investments, the scale of the issue is likely to be far less significant through a platform. Moreover, as property investments made on crowdfunding platforms are easy to diversify, the impact of a single property failing to perform as expected will have a minimal impact on an investor’s portfolio – contrasting with tradition property investors that suffer from lower diversification levels.

Access to property

Finally, if an investor uses a property crowdfunding platform, they will not benefit from being able to visit the property. In essence, the individual investor owns a share an investment rather than the whole. Therefore, as the property is co-owned, the individual investor has no right of access to the property and cannot later convert it into a residential property for themselves. Lacking physical access to a property is a small downside considering the overwhelming benefits property investments via crowdfunding platforms provide. Furthermore, this issue is only relevant for those that wish to convert an investment into their own residence.

Overall

Property crowdfunding offers significant advantages over tradition methods of investing in property. Some of the main benefits of platform investing include: ease, diversification, efficiency, smaller minimum investments, access by foreign investors and flexibility. The main disadvantages of property crowdfunding investments are related to physical access rights and management control. However, physical access limitations only apply to investors wishing to convert their investment into their own residence. Additionally, management outsourcing allows experts in their niche to manage investment properties efficiency. Professional management of a property often benefits from scale – put simply, property management becomes more efficient when the size of an investment increases.

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